What is driving these shifts? In a January 28, 2012 New York Times Op-Ed piece Made in the World , Thomas Friedman argues, “Many CEOs, …increasingly see the world as a place where their products can be made anywhere through global supply chains (often assembled with nonunion-protected labor) and sold everywhere.” Globally integrated supply chains are transforming traditional business models and shifting yesterday’s outsourcing choices and trade-offs.

The transfer of control of a process, product, or service to an external provider can take a variety of forms. The value in strategic outsourcing can include an organization’s ability to:

Reduce costs

Improve services delivery

Engage in strategic partnerships that enable innovation, growth, and desired business outcomes

Traditional strategic outsourcing has often centered on transferring services to an external services provider with a focus on cost reduction. Outsourcing models are changing in new ways - why? What is driving these shifts and what can an organization do to capitalize on these changes?

Our team at the IBM Center for Applied Insights set out earlier this year to investigate market changes, identify emerging trends, and develop evidence-based research that explores how forward-thinking companies are responding to these trends.

Our premise is that the changing global dynamic, combined with technology-driven market shifts, is creating an opportunity for organizations to move beyond sourcing primarily for cost advantage to partnering for competitive advantage and desired business outcomes. Some of the technology-fueled market shifts reshaping the outsourcing landscape include:

Big data generated from multiple sources is changing how organizations make decisions and leverage predictive insights for competitive advantage

Recently, IBM conducted a survey of 97 C-Suite Sourcing executives and found that seven out of ten plan to outsource for strategic reasons like driving growth and innovation. Based on their chief motivation, we categorized these organizations as:

Cost-cutters–27 percent outsource their IT infrastructure to reduce operations costs

Innovators–36 percent outsource multiple parts of the business to enable transformation and innovation

What we found most interesting was the progression of objectives across these three groups. Cost-cutters indicate they want one primary outcome from their sourcing relationships: cost savings. The majority of growth-seekers want to reduce costs, but also faster time to market for new products and services, and increased efficiency and effectiveness across the entire value chain. Innovators expect all of the above–and more. In addition to cost reduction, speed-to-market, and value chain efficiency, the majority of innovators want providers to help them:

Based on changes we’re observing in the market, along with direct experience working with clients, we initiated survey research to explore the premise that outsourcing motivations have shifted, and therefore, so should sourcing execution. Traditional outsourcing was focused on cost savings – now we’re seeing a shift to sourcing for skills and expertise – cost is still important, but organizations are indicating that they’re looking for higher business value outcomes as well.

To better understand sourcing motivations and execution, we started this research with three objectives:

To understand how sourcing motivations are changing

To determine how sourcing strategies impact financial performance

For those clients who embrace a new sourcing strategy, do they have different expectations? And, how do they structure and manage their sourcing relationships?

The rise in social, mobile, cloud computing and big data is creating tremendous potential for innovation. But it’s also forcing C-suite leaders to reconsider whether their organizations have the necessary expertise to capitalize on these opportunities. Of the number of factors impacting their organizations such as market factors, regulatory concerns, globalization, environmental issues, etc, CEOs reported technology as the most important factor impacting their organizations over the next three to five years. This is forcing organizations to rethink how they operate - creating new challenges and opportunities.

Across the C-suite, we’re seeing a pattern of partnering to get the right skills and expertise to innovate faster and move the business forward.

69% of CEOs are looking to partner extensively

53% of CEOs are partnering for innovation

92% of CMOs will increase use of external partnerships for customer and data analytics

65% of growth-focused CIOs are partnering extensively to change the mix of skills, expertise and capabilities

We’re seeing a focus on looking to partner extensively, partner for innovation, and gain new skills that they haven’t had before. This shift in mindset – bringing strategic capabilities in, versus sending work out – is one reason enterprises are balking at the word “outsourcing” to describe these sourcing relationships.

To better understand the changing dynamics in business and IT services sourcing, we surveyed 1,351 sourcing decision makers from around the world. Our findings suggest that sourcing motivations are evolving beyond cost savings to include higher-order business outcomes like competitive advantage and innovation.

This sample was intentionally designed to be robust and diverse and included:

Growth and major markets

Business and IT leaders

12 countries

18 industries

C-level and key decision makers. Respondents had to indicate they played a key role in sourcing decisions for their organization to participate.

When we looked at breadth of outsourcing and primary motivation, this 2x2 segmentation model emerged:

Four partnering strategies:

Enterprise Innovators are looking to outsource broadly, and indicate a primary motivation of innovation.

Focused Optimizers are motivated to innovate, but are more narrow in their approach.

Enterprise Optimizers indicate they partner extensively, but they do outsource primarily for efficiency. They indicate they’re not yet looking to incorporate innovation in their overarching sourcing strategy.

Focused Optimizers, the largest population, partner narrowly for efficiency and effectiveness.

The y-axis explores primary motivation for outsourcing. We presented a range of options from traditional motivations focused on staff augmentation, IT or business process cost reduction, to productivity improvements achieved through standardization, automation, centralization, to innovation. We defined innovation to be aspirational - changing the way your industry works, changing the way you monetize value and redefining your company’s role in the value chain, including how you collaborate and how you operate.

For the x-axis, we looked at respondents’ current extent of outsourcing. We asked respondents whether they outsource across 80 different business processes, applications and IT functions. Using a trimmed mean analysis approach, the midpoint is 14. Those below the midpoint were categorized as sourcing in a more narrow fashion, those at or above the midpoint were categorized as sourcing broadly.

For those below the horizontal line, their primary motivation is operational efficiency or effectiveness. This includes traditional outsourcing objectives like short-term resource augmentation, cost reduction and traditional productivity improvements. Only 7% of surveyed decision makers said cost reduction and efficiency was the sole reason they outsourced IT infrastructure, applications and business processes. So while we’ll see in a future blog post that cost savings is a key business priority across the sample, it is not the sole reason for outsourcing for the majority of our respondents.

It is not enough to outsource broadly or just for innovation within a discrete process or function. It’s the combination of sourcing broadly across the enterprise for innovation that drives financial outperformance.

My next post explores the link between partnership strategy and financial performance. Log in and leave a comment!

Today we’re launching new research of financial services that build on findings from our global cross-industry study, Why partnering strategies matter, released in May of this year. Here, I'll explore how the financial services industry compares to our global study - where they outperform, and where they have an opportunity to improve performance.

What did we find?

The financial services sector has faced a number of challenges in recent years. A global economic crisis slowed growth and put pressure on these enterprises to creatively cut costs while also facing increased governmental compliance and regulatory requirements. Client expectations and sophistication also rose. Similar to respondents in our global study, leading financial firms began a shift in sourcing motivations and execution.

As reported in our cross-industry study, leaders that source broadly and for innovation do better financially, reporting 2x revenue growth and 5x gross profit growth compared to their peers. Financial services respondents are no different. What is different for financial services companies is increased attention on agility achieved through new business and operating models, and responding better by anticipating market shifts.

Does the financial services industry partner differently?

First, we looked at how financial services compare to global respondents across four partnering strategies. When we look at extent of outsourcing and primary sourcing motivation, we find a higher percent of Enterprise Innovators and Enterprise Optimizers in financial services. What does this mean? Respondents in financial services are at the forefront of this shift in sourcing strategy - sourcing more broadly across the organization compared to their industry peers.

Are business priorities and partner capabilities different?

Enterprise Innovators in the financial services sector are similar to leaders in other industries - putting an emphasis on agility and responsiveness to achieve desired business results. However, financial services leaders differ in three areas: their focus on enabling new business models to outperform, anticipating market shifts, and creating a culture of innovation throughout the organization. Enterprise Innovators in financial services order these priorities more than 20 percent higher than their peers in other industries.

Can these leaders do more?

Financial services organizations can do more to improve the connection between shifting sourcing motivations and execution. Enterprise Innovators in financial services are aligning their services with business outcomes, but are less likely to tie metrics to business outcomes. They are on par in transforming their scope to include a broad range of delivery models, include partners in strategy, and vertically integrate contracts across infrastructure, business processes, and applications. However, when it comes to skills, they are less likely to make the required role changes to current personnel. Finally, they are moving toward integrating governance across service providers, but can improve by implementing enterprise-wide governance.

To see our full study - ’Partnering for innovation in financial services’ and to access the global cross-industry study, visit our page.

This is the second post in a 3-part series about our new Sourcing research. My first blog post in this series looked at current outsourcing market shifts - a broader and more strategic view of sourcing relationships. Today I am exploring the financial impact of sourcing decision-making. Enterprises that source broadly across the organization and with a primary focus on innovation perform better financially – racking up 2x the revenue growth and 5x the gross profit growth compared to their peers.

An initial look at average revenue growth and gross profit growth across segments suggested a potential correlation between partnering strategy and business performance. You can see below that respondents who are both sourcing broadly and sourcing for innovation, outperform by considerable margins (as you may recall we are calling these outperformers 'Enterprise Innovators'). However, we knew that a number of other factors – such as industry, company size, geography – could be influencing these results.

We initiated analysis to help rule out firmographic characteristics as the reason for Enterprise Innovators’ outperformance. Against a slate of financial measures, each based on 3-year 2011 compound annual growth rates, Enterprise Innovators trended higher than the average of the other segments combined. This overall pattern is statistically significant. However, since this sourcing study is observational, we could not definitively conclude that Enterprise Innovators’ approach to sourcing causes better financial performance based on this correlation. To help make that case, we used an analytical technique called propensity score modeling.

Propensity score analysis matches Enterprise Innovators with other organizations in the sample that have similar firmographic characteristics, such as industry, company size and geography. In this case, we calculated propensity scores using 68 Dun & Bradstreet variables – those which showed a significant difference between Enterprise Innovators and the other segments.

Enterprise Innovators scored higher than other businesses on all financial measures even after propensity score matching, suggesting their approach to sourcing – i.e., sourcing broadly to drive innovation – was a contributing factor to this higher performance.

My next blog post in this series will look at top business priorities and partner capabilities across the sample, and then explore how Enterprise Innovators structure, scope, and govern their sourcing relationships. Please log in and leave a comment!

This is my third post in our series about research into changing sourcing strategy and execution. My first post looked at how leaders are taking a broader and more strategic view of sourcing relationships. In the second, I looked at the dramatic financial impact of sourcing decision-making (2x the revenue growth and 5x the gross profit growth compared to their peers!). Here, I’ll explore top business priorities and partner capabilities Enterprise Innovators are looking at to structure, scope, and govern these shifting sourcing relationships.

Priorities are shifting and capabilities must adapt to matchEnterprise Innovators include enterprises which put a greater focus on innovation and sourcing for a broad set of capabilities. Agility and market responsiveness are key differentiators. If they are going to get the rapid innovation and growth they seek, they need specific capabilities from their chosen partners.

Enterprise Innovators are looking for providers that can help them wherever they want to go:

Geographic specific experience and expertise

Proven physical and IT infrastructure

Flexible, integrated supply chains

Creative approaches to existing channels

Proactive ideas for new technology

Enterprise Innovators are experimenting with new business models along the way, trying to learn quickly and driving new ideas to results. If partners cannot respond, they may be left behind.

As I’ve said, these leaders are seeking a different kind of provider, in truth, a different type of relationship. To accomplish their business objectives, they recognize the need to alter the way they structure and manage their long-term alliances. Key facets of this change is outcome visibility, a focus on transformation (not just moving capabilities), and keeping all players involved in governance.

How can we see success?
Historically, service level agreements have focused on operational or cost-centric measures like system availability or cost per service desk call. But new leaders are aligning measurements with business priorities. In the financial services sector, that might mean driving uptake in mobile banking; in the telco industry, it might be lowering subscriber acquisition cost or increasing up- and cross-sell rates; or for a retailer, it might involve meeting an aggressive roll-out schedule for expansion into a new market. This shift in thinking gives rise to new vendor valuation models – ones that can help assess a provider’s contribution to broader business objectives beyond cost reduction.

Must everything change?
Enterprise Innovators are sourcing to get capabilities they need to innovate on a broad scale. So there’s a transformative bent to their sourcing relationships. Their contracts are more likely to be vertically integrated – they may include business process, applications and technology infrastructure – to enable more holistic change.

Enterprise Innovators are more likely to engage partners for specific industry or functional expertise which they can leverage to transform the roles of their employees. If their aim is marketing innovation and they’re sourcing analytics capabilities, they want their partner to do more than just provide a basic service – they want help reshaping how the marketing function works – to drive beyond understanding customer segments to understanding individual customers, from describing what’s happening to predicting what’s next.

Can we just work together?
Enterprise Innovators are pushing faster toward enterprise-wide governance. Because they’re focused on results, they recognize the need for input and collaboration across all the business units and providers involved. If the goal is accelerating the launch of new products and services, then marketing, manufacturing, distribution and sales may all need a voice in related services sourcing decisions.

This post concludes my three part series on sourcing market shifts. Want to continue the conversation? To learn more, visit our page and download the whitepaper!

Yesterday, we hosted a virtual livestream launch of our new Sourcing research. We’re live with exciting new research that explores how business and IT services sourcing are shifting – and the link between these shifting motivations and better business performance.

The sourcing market is changing. Clients are looking for sourcing relationships that offer higher value business outcomes in addition to cost savings. From our direct experience working with clients and general market observations, we've recognized technology shifts are accelerating the need for capabilities organizations don't have in-house.

To explore the extent of this shift – and how it is impacting organizations' sourcing motivations and strategies – we initiated a large-scale research project. Through this research, we saw distinct differences in the way that clients view outsourcing, and we uncovered a link between innovative sourcing practices and better business performance.

To better understand sourcing motivations and execution, we had three objectives for this study:

To understand how sourcing motivations are changing

To determine how sourcing strategies impact financial performance of the business

For those customers who embrace a new sourcing strategy, do they have different expectations? And, how do they structure and manage their sourcing relationships?

For the virtual panel, Rich Lechner, IBM VP of Services Marketing, served as moderator. I kicked off the discussion with an overview of study methodology and key findings. Then we were joined by the following experts: